Fra BNP Paribas
KEY MESSAGES
The ECB policy action and the downward revisions
to its growth projections sent a dovish message.
The market took notice. However, the details
revealed a more mixed picture.
We also detected in the press conference some
potential contradictions and even some hesitation.
In our view, the central bank is overly optimistic
about the growth outlook and more divided than it
wants to suggest, and it appears reluctant to commit
the next president to a particular course of action.
If, as we expect, eurozone growth remains below
potential for longer than the policymakers currently
assume, their policy response risks being less swift
than it was today – in other words, the ECB may
find itself on the back foot once again.
We had been expecting a TLTRO announcement as
soon as March for a while, but the ECB surprised us,
and the markets, by providing the details of it, too,
along with a change to its forward guidance.
Significantly, Mario Draghi said that risks remain tilted
to the downside, while the decision taken was
unanimous. This was the dovish message.
However, we would argue that the details on both the
TLTRO and forward guidance fell short of what we
would have expected and what is required to prevent
a more sustained economic slowdown.
The change to the date element of the forward
guidance to year-end merely rubberstamped current
market pricing. On the TLTRO, the option of a floating
rate for a two-year duration was probably the least
dovish that might have been expected.
We cannot help thinking that this reflects a
compromise, driven by two factors.
A significant part of the Council might still not have
given up on policy normalisation.
The fact that the combined decision on the TLTRO
and forward guidance does not commit the ECB
beyond December suggests that the Council is
reluctant to tie the next president’s hands. If so, we
think the bar for further action in the near term is
rather high. What’s more, it underlines – if that was
necessary – how crucial the choice of the next
ECB president is.
Admittedly, Mario Draghi emphasised the “optionality”
that the Governing Council retains, and the ability to
“amplify” these policy measures in future. The
threshold for such a move might be rather high, though.
In sum, we think Mr Draghi wanted to convey a
message of strength with a double announcement that
caught market expectations by surprise. Judging from
the market reaction, job done! We wonder, however,
whether this masks some weakness.
Rates: The extension of the period of ample liquidity still
favours carry trades and forward steepeners at the long
end of the curve, in our view. So we recommend long 5y
Spain and France, 3s5s flatteners in Italy, EUR swap
steepeners in 2y2y vs 10y10y and 2y fwd 10s30s, among
others.
FX: Today’s more unexpectedly dovish outcome
suggests that the risks to our end-Q1 EURUSD forecast
of 1.15 are heavily skewed to the downside. However, we
do not think EURUSD is the cleanest expression of our
bearish macro view on the eurozone. We favour EURJPY
downside and remain short in our trade idea portfolio.
We had been expecting a TLTRO announcement as
soon as March for a while, but the ECB surprised us,
and the markets, by providing the details of it, too,
along with a change to its forward guidance.
Significantly, Mario Draghi said that risks remain tilted
to the downside, while the decision taken was
unanimous. This was the dovish message.
However, we would argue that the details on both the
TLTRO and forward guidance fell short of what we
would have expected and what is required to prevent
a more sustained economic slowdown.
The change to the date element of the forward
guidance to year-end merely rubberstamped current
market pricing. On the TLTRO, the option of a floating
rate for a two-year duration was probably the least
dovish that might have been expected.
We cannot help thinking that this reflects a
compromise, driven by two factors.
A significant part of the Council might still not have
given up on policy normalisation.
The fact that the combined decision on the TLTRO
and forward guidance does not commit the ECB
beyond December suggests that the Council is
reluctant to tie the next president’s hands. If so, we
think the bar for further action in the near term is
rather high. What’s more, it underlines – if that was
necessary – how crucial the choice of the next
ECB president is.
Admittedly, Mario Draghi emphasised the “optionality”
that the Governing Council retains, and the ability to
“amplify” these policy measures in future. The
threshold for such a move might be rather high, though.
In sum, we think Mr Draghi wanted to convey a
message of strength with a double announcement that
caught market expectations by surprise. Judging from
the market reaction, job done! We wonder, however,
whether this masks some weakness
